Ralph R. Mabey, trustee in the Chapter 11 bankruptcy proceedings of Cajun Electric Power Co-op., has entered into an amended asset-purchase agreement with Louisiana Generating LLC for the purchase...
Nuclear Decommissioning Trust Funds: Rethinking the Approach
a shortfall in NDT funds is, thus, both highlighted and exacerbated.
This climate suggests the idea of termination insurance to cover any shortfall in NDTs. Termination insurance would pay a contracted amount to a nuclear plant owner/ operator (or other beneficiary) in the event of a premature shutdown, given stipulated terms and conditions of operation and shutdown. [Some limited coverage is already available from property damage insurance to apply to any NDT shortfall in the case of shutdown due to an accident.] At the least, any reexamination of trust management should deal with the notion that the plant owner in effect holds a put option to defray its decommissioning liability, and the fact that the cost of such insurance can be estimated using option-pricing theory.
The Present Approach and its Problems
The present approach calls for a dollar estimate of future nuclear decommissioning costs (the "certification amount"), in accordance with NRC regulations.4 This dollar amount forms the basis for periodic accruals under ratemaking to fund the NDT, in the form of an external sinking fund. Revenues collected to fund the trust are currently deductible for income tax purposes, provided that the funds go into a so-called Qualified Trust set up in accordance with section 468A of the Internal Revenue Code.
This procedure invites an analogy to the operation and actuarial basis of a defined-benefit pension plan. Since the expected payout dates in most cases extend many years in the future, a gap usually exists between the amount of actual assets on hand, and the ultimate liability amount. The current market value of the assets plus the expected income and expected future accruals equals the present value of the liability, discounted at an appropriate rate.
In practice, the approach to nuclear decommissioning tends to be bifurcated: An engineering effort focuses on estimating and minimizing the liability in cost terms. Separately, a financial activity related to the trust fund(s) focuses on maximizing the investment returns to the NDT. Now that IRS regulations no longer restrict qualified NDTs to "Black Lung" trust investments,5 state public utility commissions (PUCs) have typically endorsed investing a high percentage of the funds in common stocks, especially for NDTs contemplating funds
accumulation and investment over many years.
The presumption is that stocks represent prudent long-term holdings because they offer a higher expected rate of return than bonds, and the probability of realizing the expected rate of return increases with the length of the holding period. Yet, because returns on stocks generally prove more volatile than returns on high-grade fixed-income securities, NDT managers presumably would shift funds judiciously from stocks to fixed-income assets as decommissioning becomes imminent, so that the money needed to pay for decommissioning can actually be obtained by liquidating noncash assets in the NDT at the time required.
This bifurcated approach presents problems. First, it is unnecessarily risky, because no advantage is taken of the possibility to better match the portfolio asset structure to the characteristics of the decommissioning liability. Furthermore, although approved NDT contributions are tax deductible, the trust income, unlike pension trust income, is taxable to